Regional Queensland’s power handicap

The Queensland government continues to compound issues relating to economic efficiency, with its long-standing commitment to ensure consumers in regional Queensland do not pay significantly more for electricity than consumers in the state’s south-east. We are in danger of having the uniform-tariff-policy tail-wag the energy policy dog.

The costs of supplying electricity to regional Queensland are greater than the costs of supplying consumers in the south-east. This is due principally to relatively high network costs incurred in reticulating power in remote areas with low population densities. In part, but not entirely, this reflects decisions to concentrate generation in the south-east corner.

It is perfectly legitimate for the government to offset this cost burden by providing, as it does, a subsidy to regional consumers – a community service obligation (CSO). But why not deliver the CSO in a way that maximises the ability of the government to implement other reforms to the energy system?

Many consumers in regional Queensland would like to see competition in electricity retailing, because its absence denies them the benefits available to consumers in Brisbane and the rest of the south-east. Perhaps the economic geography of regional Queensland is fundamentally incompatible with competition in the retail electricity market. But even if this is not the case, the policy ensures there will be no competition.

The CSO is paid to Ergon Retail. It allows Ergon Retail to pay Ergon Network the full cost of reticulating electricity to regional areas and then to sell electricity to consumers at prices that reflect subsidised network costs. No other retailers can compete because none can access the CSO. If the CSO was paid to Ergon Network, it could offer subsidised network charges to any retailer that wished to enter the market. Then retail competition might have a chance.

Is there really any reason for the uniform tariff policy to prevent the deregulation of retail prices in south-east Queensland?

The main issue is determining the necessary size of the CSO. At present, this is done with reference to regulated retail prices set by the Queensland Competition Authority (QCA) to reflect the costs of supplying electricity to consumers in south-east Queensland. But it could equally easily be done with reference to observed retail prices in a deregulated south-east Queensland market. Or since differences in network costs account for most of the difference between the costs of supplying regional customers and the costs of supplying customers in the south-east, it could be done simply on the basis of differences between Ergon’s regional network charges and Energex’s south-eastern charges.

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This implies the CSO is not sufficient to equalise the prices that regional and south-eastern consumers actually pay.

Determining the size of the CSO with reference to observed prices from a deregulated south-eastern market would remove this limitation on the uniformity of the uniform tariff policy, albeit at the expense of an increase in the budgetary cost of the CSO.

Maybe the government’s reluctance to embrace these rather obvious improvements to its retail-electricity policy reflects extreme risk aversion: an unwillingness to risk the electorate in regional areas suspecting that the uniform tariff policy is threatened, no matter how ill-founded such a suspicion might be. Policy outcomes that make us all better off could be achieved if politics were more about leadership and education of the public than about avoiding any risk of disturbing the electorate’s views.

If I thought I might lose an election tomorrow, I might take the risk-averse view. But if I knew it would take me at least five years to lose, I hope I would be bolder.